PE Case Study Challenge

I had a few questions about a case study I had to do a few days ago while interviewing for an internship position at a PE fund.

After getting all of the qualitative stuff out of the way, I figured I would go ahead and create an lbo model. However, the document they gave me was only 6 pages long and did not have all of the information -- the case study was from a Harvard Business course.

One thing that bugged me was the Interest expense. The company in question used "$5.8m senior debt @ 12%"and "$2.25m Sellers debt @ 7%, 5 years" to finance 86% of it. Would the interest expense be around ~$855,000 annually?

Aside from that, when i got to the NWC, i hit a wall. I looked through the document again and there was no balance sheet provided. The only thing provided was a finance statement that included Revenue, Cost of Sales, Operating Expenses, Adj. EBITDA, and Capex (maintenance and growth).

Is it impossible to proceed with an LBO Model? Should I have just stuck to a more qualitative side and pointed out the nice and steady growth in EBITDA and stable EBITDA Margin of 40%?

Many thanks!

 
Best Response

Couple thoughts:

  1. In the absence of info, utilize what you're given. Flesh out the EBITDA story (stable, strong margins, etc) and think about growth prospects and the industry.
  2. Once you've nailed down the qualitative, try and support with quantitative info but stick to what is known. If you're going to make a bunch of assumptions then the model probably isn't going to be super useful. Start by calculating multiples and see if it's looks like a decent buy and then go conservative on your assumptions and see what your model spits out.
  3. If they want a valuation, then yes do an LBO, if you have interest details, otherwise do a DCF. You can make assumptions for WC if you know about the industry or the current market. if I didn't have enough info then I'd pick conservative metrics, calculate WC as a % of revenue and then probably add another % for good measure.
 

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